MARKET WATCH: Crude oil prices drop in fear of demand destruction

Having spiked to a 4-year high for Brent in the previous session on a false Iranian report of damage to a Saudi Arabian pipeline, crude oil prices fell Mar. 2 on renewed fears that high prices are destroying demand.

“Net for last week, West Texas Intermediate and Brent fell by $3.07/bbl and $1.82/bbl, respectively. The rally in the oil market that started at the end of January appeared to run out of steam and had entered a stage of violent correction, as both bulls and bears are extremely nervous. As we start another month, new flows and monthly rolls of commodity index funds are likely to induce more intraday volatility for the rest of this week,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

In Houston, analysts at Raymond James & Associates Inc. reported, “Tensions around Iran remain high as President Barack Obama is set to meet with Israeli Prime Minister Benjamin Netanyahu to discuss Iran's nuclear program. And with the ‘risk premium’ pushing crude higher, Iran's biggest Indian oil client, Mangalore Refinery & Petrochemicals Ltd., has decided to cut its annual import deal by as much as 44% to 80,000 b/d in 2012-13. The prospects of tighter supply and demand destruction isn't worrying the Saudis as the group has decided to increase the premium for Arab Light grade by $2.80/bbl over the Oman-Dubai grade. Meanwhile, global markets are down on fresh economic data from Europe and China, which has raised the expectations for a recession within Europe followed by the prospects of slower growth out of China as officials have stated that it would target a slower growth rate of 7.5% for 2012.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts reported international sanctions against Iran are starting to bite, with front-month North Sea futures remaining close to $125/bbl as an unintended consequence.

Although WTI futures remain “stubbornly depressed” relative to other benchmark crudes, trading currently at $17/bbl under ICE Brent and having recently dropped to a $19/bbl discount, other US grades of oil have strengthened with the North Sea grade. “Light Louisiana Sweet, which increasingly acts as the US physical marker, averaged around $1/bbl premium to the North Sea grade in February and $18.50/bbl premium to the landlocked WTI benchmark. This is translating into higher pump prices; although we are not yet at the peak levels above $4/gal seen in 2008, the average retail price for all grades and all formulations is around $3.78/gal, according to the Department of Energy,” KBC analysts reported.

“This has been enough to make the soaring oil price a political football in the run up to US presidential elections in November. Having risked looking less tough on Iran than hard-talking Republican contender Mitt Romney, US President Obama is now being battered with the consequences of the tough action on sanctions that have been taken. So far, the rising production of domestic tight oil and oil shale has not come to the rescue,” they said.

Estimates of how much new oil will come on the market in the US over the next few years are 2-4 million b/d, KBC analysts said.

Energy prices

The April contract for benchmark US light, sweet crudes traded widely at $105.80-109.03/bbl before closing at $106.70/bbl, down $2.14 Mar. 2 on the New York Mercantile Exchange. The May contract dropped $2.10 to $107.17/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.14 to $106.70/bbl.

Heating oil for April delivery declined 7.35¢ to $3.20/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 7.96¢ to $3.27/gal.

The April natural gas contract increased 2.1¢ to $2.48/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1.2¢ to $2.38/MMbtu.

In London, the April IPE contract for North Sea Brent dropped $2.55 to $123.65/bbl. Gas oil for March gained $1 to $1,010.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up $1 to $123.08/bbl.